Is P2P a Safe Investment?
By Money Mage · · Financial Independence, P2P, Crowdfunding, PortfoliosFundingSecure the pawnbroker-come-peer-to-peer lending platform has failed. Their founders mostly cashed out 12 months ago[]. This is the second UK-based P2P failure in 2019, with Lendy failing in May.
If you are an investor with FundingSecure, you are now locked out of your account. You have no idea if you’ll get your money back. You’ll have to wait and see. Given FundingSecure was the wild west[], you might struggle to get your capital back. This is stark news.
In some good news, Lendy’s administrator believes the loan book is at least partially realisable. The first payments back to investors from loan payments will occur on Monday.
If you do have an investment with FundingSecure and want to contact the administrator, read the full details here
Given this is the third stark warning about P2P in the UK in 2019, is P2P a safe investment?
What is P2P Lending?
Peer to Peer (P2P) Lending is a new form of Investment in the UK. You pool your money with other investors via a P2P platform. Called crowdfunding. The P2P platform then lets you loan out your collective funds to borrowers.
The loan is often between you and the borrower, and the platform is an intermediary. This may depend on the platform. Sometimes the loan between another company and the borrower. Your investment is sometimes diversified among many loans. This depends on the platform and your choices.
The type of loans depends on the platform. Consumer loans. Business loans. Property. Even camels.
I shit you not: Camels. Forget Somali Pirates. You can own your very own milk-producing camel in Mogadishu. If you want to take on the risk.
In the UK, you can wrap up your Peer to Peer Investments in the new Innovative Finance ISA (IFISA). The IFISA is a new ISA introduced in April 2016 designed for P2P loans. This means any interest earned is tax-free. It forms part of your annual ISA allowance of £20K.
With savings rates so low, P2P has surged in popularity. The attractive rates are often higher than safer forms of investing - 5% or more. However, P2P is significantly riskier than cash savings.
FundingSecure “Junk”
FundingSecure was a pawnbroker-come-peer-to-peer-lender. Borrowers could take out loans secured against their ‘high worth’ assets. Like antiques. Jewellery. Artwork. Yachts. Luxury Watches. Luxury Cars. Even Picassos. FundingSecure worked closely with an ‘Auction House’ to value the securities.
In FundingSecure Ltd v Matthew Green[], FundingSecure lent £2.3m to Green, an alleged fraudster and launderer. The loans were secured against high-worth paintings by the likes of Picasso & Dufy. Despite FundingSecure stating the securities would be held by them, Green took out further loans secured against the artwork. Green naturally defaulted and eloped to rehab in Spain.
In March[] this year, £24m of FundingSecure’s £88m loan book was in default.
I mean if this isn’t the definition of junk, I don’t know what is. FundingSecure was the wild west[]
Administrators were appointed 3 days ago.
Is Peer to Peer Lending Safe?
The short answer is Crowdfunding Investments are risky. ‘Safety’ depends on the platform and loan.
Here are a few risks to consider:
- How safe is the underlying loan? What is it’s rating? Who is it with? What type of loan?
- Is there security against the loan? Who holds the security? What’s to stop the security being sold or double-dipped?
- How safe is the Platform? Two have failed in the UK in 2019. What background checks will you do on the platform?
- What happens if the loan defaults? Do you get any money back?
- Does the platform offer any protection if a loan defaults? Does the provider offer a ‘protection pool’? How is the ‘protection pool’ used and distributed?
- What is the liquidity of the platform? How quickly can you get your money out if you need to?
- What are your chances of getting money back from an Administrator if the platform fails?
Money Mage believes:
- P2P is a risky investment
- Your capital is at risk - you might not get back any of what you put in
- P2P should not form a significant part of your investment portfolio
- Prepare to lose some or all of your investment. Invest only what you can afford to lose.
- You should only invest if you plan to leave the money alone for the term, as liquidity may be a problem.
Money Mage currently holds no funds in P2P due to these risks. This may change in the future. Money Mage believes P2P is inadequately protected and regulated in the UK. With new regulations in December 2019, the situation will improve.
This is an opinion and not advice! See the Disclaimer.
Financial Conduct Authority Warning
The regulator has been unhappy with the state of P2P and investor exposure.
The Financial Conduct Authority wrote to the CEOs of all P2P lending firms in the UK in March 2019. The FCA strengthened regulation of P2P in June 2019. The new regulations come into force in December 2019.
The FCA wants to improve the situation. The goals of the improved regulation according to the FCA:
Investors:
- have the necessary information about a platform’s services and charges to help them make informed decisions
- have clear and accurate information about the investment risk of a product to make suitable investment choices in line with their risk tolerance
- are appropriately rewarded for the risks they are taking
- understand that their capital is at risk and they may suffer losses
Platforms:
- structure their business in a way that aligns their fees, charges and profits with the principle of treating customers fairly carry out risk assessment and pricing of underlying assets to a high standard
- have appropriate arrangements to ensure that P2P agreements continue to be administered if the platform ceases to operate for any reason
The UK strengthening of regulation of P2P in December 2019 means:
- ‘Casual’ Investors capped at investing 10% of their assets in P2P. You can opt-out of this self-identifying as a ‘Sophisticated’ investor.
- Platforms will need to assess ‘Casual’ investors knowledge of P2P. Including knowledge of the risks.
- Platforms will need more resilience for ‘wind down’ plans if they fail. They will have to prove how the loan book will continue in the event of platform failure.
This strengthening will be a good thing for P2P in the UK. Ratesetter CEO Rhydian Lewis agrees:
“No longer can our sector be dismissed as the Wild West of investing: the cowboys are being driven out and the regulation is now on a par with mainstream savings and investment choices.”
The UK regulations changes come into effect in December 2019.
Fuel on the FIRE
This won’t be a popular opinion I know.
Crowdfunded loan platforms are popular among Financial Independence, Retire Early Blogs. Fueled by affiliate programs & referral kickbacks.
One side of the coin is good intention. Rationality. Warnings about risk. Analysis of liquidity. Recommendations to diversify across platforms. Consideration of platform insolvency.
The other side of the coin is self-interest in growing blog revenue to speed up Financial Independence. Over-focus on returns. “Over 30% growth”. Skimming over some of the risks. Non-obvious referral links. Positive spin not objective analysis.
Would you put 10% of your wealth into a company formed in 2017 who’s registered offices are in Tbilisi? I know they have a pretty CEO and all. The old “too good to be true” adage rings loud.
Know the P2P Risks
P2P is risky. If you understand the risks, you can plan to mitigate them. If you are comfortable with the mitigations, P2P might be for you.
With P2P:
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Your capital is at risk, you might not get back what you put in.
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The ‘interest’ advertised is not guaranteed like savings. P2P is an investment, not a savings account.
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The platform may collapse. If this happens, what happens to your investment?
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The loan may default. If that happens, what happens to your investment?
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Are your loans junk? Secured against artwork that’s already being used as a security?[]
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Your loan might be ‘packaged’ by the platform. What’s in the loan? Is it a collection of loans? Are there junk loans mixed in the package?
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Does the platform have a ‘protection pool’ or guarantee loans if they default? How is this distributed?
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The loan book might be difficult for an administrator to sell on.
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If the platform fails, it may take months to get your money back - if at all. In the platform was UK based, the administrator will have to sell the loan book. Or find a way of servicing or recovering the loans. This will take time.
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If the platform fails, the loan book might be sold to a company under a different regulatory regime
Money Mage Verdict
Peer to peer crowdfunded platforms are risky.
Some platforms are completely unregulated. Some platforms are in jurisdictions where you will have no recourse. In the case of Lendy failing, administrators are able to realise a portion of the loan book. I doubt the same will apply if your Mogadishu or Tbilisi-based platforms collapse.
Money Mage currently holds no investments in P2P: Some platforms are nothing less than ‘the wild west’.
If you do invest in P2P, diversify across platforms to reduce your risk of a platform collapsing. FundingSecure and Lendy have collapsed in the past 6 months alone. Also, ensure P2P is a small part of a wider, well diversified investment portfolio.
With the changes in regulations in the UK in December 2019 my view may change. Let’s see.
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Sources and Attribution
- https://www.p2pfinancenews.co.uk/2018/11/02/fundingsecure-owners-sell-off-majority-stake-to-fund-growth-plans/
- https://www.maitlandchambers.com/information/recent-cases/funding-secure-ltd-v-matthew-green-2019
- https://www.telegraph.co.uk/investing/news/widespread-defaults-hit-peer-to-peer-investors-chasing-12pc/
- https://beta.companieshouse.gov.uk/company/08120200
- https://uk.trustpilot.com/review/www.fundingsecure.com
- Agrikaab Camel, (c) Agrikaab.
- Musée Picasso, (c) Christophe Becker, CC-BY-ND